Blockchain’s Potential in Commodity Trading Overhyped, BCG Concludes

Boston Consulting Group (BCG) has concluded that the use of blockchain technology in the commodity sector is overhyped, at least from a trading perspective. In the last two years, commodity companies and banks have been busy conducting trials and implementing the distributed ledger technology (DLT), but its benefits for commodity trading applications have been exaggerated, according to the US-based management consultancy.

Antti Belt, who co-authored the BCG report, commented for Reuters:

“There are so many pilot schemes but none have become real production scale systems yet. One of the problems is that it’s not designed for physical trades. The fundamental issue: how do you track a physical entity in a virtual world? It’s two worlds colliding.”

So far, the volume of trades via blockchain projects is insignificant, making it difficult to come up with an accurate estimate as to when the technology might be implemented on a mass scale. Some of the major issues holding back mass adoption relate to reconciling terminologies and determining whether the implementation of DLT is even financially viable.

“The industry is very old and everyone uses a different language. How do you define quality, shipment schedules; a lot of reconciliation is currently needed for both sides,” Belt noted, adding: “People have spent millions, sometimes over $100 million, on IT system, do they want to do it again?”

BCG concluded that some merchant traders would not welcome the implementation of blockchain platforms given that they generate profits based on price inefficiencies and unequal distribution of data. These benefits could vanish due to blockchain’s capabilities to ensure transparency and data accuracy.

Even though BCG deems blockchain inefficient for commodity trading, major corporations and banks have experimented with the technology for commodities like diamonds, food, and oil, focusing mostly on supply chain management and product origin verification. In November 2017, oil giants Royal Dutch Shell, BP, and Statoil teamed up with a group of banks to develop a blockchain-based commodity trading platform.

BCG agrees that blockchain can successfully reduce risks related to clearing, fraud, or poor quality of goods.

However, the real-time settlement might be viewed as a drawback by some counter-parties as they have to guarantee collateral much earlier.

At the beginning of August, BCG was revealed as one of Intercontinental Exchange’s partners for a cryptocurrency project. The parent company of the NYSE is also collaborating with Microsoft and Starbucks to create a cryptocurrency platform called Bakkt.